IPO roller coaster: Should you invest?

Apply for those IPOs which are well understood, from different business models and grow the portfolio by looking at buying opportunities post listing

The year started with several big bang IPOs and investors lapped them all up. On the back of global high liquidity scenario and a market bounce back aided by the advent of half a dozen vaccines, financial markets were on daily highs, brushing away all worries from inflation to US Federal Reserve tapering, and even significant supply chain disruptions in the supply of chips and anything downstream from there: cars, gaming consoles and computers.

Real estate, too, hit new highs with rentals/prices spiking from Tel Aviv to Tacoma (a Seattle satellite city) even in Mumbai – fueled in part by the sudden reopening of schools leading to a rush of migrants flooding back to offices.

Also Read | What Paytm’s listing flop show tells us about IPO success stories

The one major relief from traffic jams was also short-lived with offices reopening and services shortages, too, were beginning to pinch. Nykaa and Policybazaar were new stock market darlings and analysts were left scratching their heads as to how were they to value these IIM Ahmedabad alumni founded start-ups? Nevertheless, investors brushed those concerns aside and jumped headlong into buying.

All was going well till the Paytm IPO was listed. On the eve of that company’s advent on major exchanges, Australian broker Macquarie released a report raising questions on their business model, lack of focus and competitive pressure. The report was picked up by financial journalists and ‘experts’ chimed in with their two-bits.

The net result was despite stakeholders’ best efforts, shares tanked 27% on day one – leaving investors wondering what they should do. And whether IPOs are worth subscribing to?

Also read: Muted debut for Paytm on D-street

Firstly, IPOs are a wonderful way to invest in hereto inaccessible firms and these may also be typical new-age businesses, but those too carry risks inherent to all equities i.e., price discovery may take time and, in the interim, there will be price volatility.

Secondly, as some of these companies grow and become successful in their own rights the payoff, if held onto, can be significant. The real question, therefore, is what is the strategy to adopt while building a portfolio, given the volatility and abysmal allotments to individuals?

In managing savings, as in life, it is important to not do things we do not understand. Thus, research about businesses before applying for their IPOs and avoid those whose business models you do not understand.

Also Read | These 10 companies saw big losses on D-Street debut

Once there is an allotment or even if no shares are allotted - it is imprudent to jump into that stock with substantial sums on opening day. Instead, allocate monies and look for a steady ‘SIP’ type investment into the stock.

Eventually, if it becomes a multi-bagger, the notional loss will be insignificant with some of the price point risk amply mitigated.

Lastly, investors should not fall in love with stocks, and should there be hints like the Yes Bank issue, they should be prepared to exit and book those losses, rather than watch the capital erode with a hope the company will do well at some point.

Also Read | Sebi mulls tightening rules for IPO proceeds utilisation

But one swallow does not make a summer and given the low survival rates of firms, diversification is key. Diversification should be across sectors, industries and potentially geographies if access and finances permit.

Therefore, apply for those which are well understood, from different business models and grow the portfolio by looking at buying opportunities post listing. It would similarly not hurt to get paid holistic portfolio advice from a SEBI registered investment advisor.

Stay safe and keep your portfolio diversified.

(The writer is a partner at Infinity Alternatives. Twitter: @anubhavary)

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